How long should your emergency fund be able to last you?
3-6 months
Economics
The study of how wealth is created and distributed
Fiscal policy
Altering tax structure and spending of governments
Monetary policy (the fed)
Regulatory body that determines amount of money in circulation along with regulating interest rates
Monetary and fiscal policy together
stabilize economy and encourage economic growth
Business cycle
Increase and decrease in nation's economic activity
Precautions to take during a financial crisis
Increase emergency fund
Know what you owe
Reduce spending
Pay off credit cards
Notify creditors of any problems
Monitor value of investments
Convert investments to cash
Spending diet
1-2 months where you dont spend money on any wants only needs
Safe investment
minimal risk of loss
Conservative investments
government bonds, certificates of deposite, mutual and corporate bonds
Moderate investments
stocks, lower rated bonds and mutual funds
Aggressive investments
speculative investments such as stocks, bonds, mutual funds, collectibles
inflation risk
The danger that money won't be worth as much in the future as it is today
interest rate risk
the risk of capital losses to which investors are exposed because of changing interest rates
Business Failure Risk
possibility that an investment will fail to pay a return to the investor due to competition, bad management etc
Systematic (Market) Risk
overall risk of market and economy, not possible to eradicate systematic risk by diversification
unsystematic risk
a risk that affects at most a small number of assets. Also, unique or asset-specific risk. Diversification can eliminate this risk.
global investment risk
The risk associated with investing internationally. Currency risk, political risk, different taxation laws, and regulatory differences are all a part of global investment risk.
Growth stocks
Stocks like amazon and netflix
investment liquidity
the ability to buy or sell and investment quickly without substantially reducing its value.
dividend
The portion of corporate profits paid out to stockholders
Bonds
Certificates of debt that carry a promise to buy back the bonds at a higher price (cause of interest)
Mutual funds
A pool of money used by a company to purchase a variety of stocks, bonds or money market instruments. Provides diversification and professional management for investors. Look at expense ratio
real estate assets
Provides returns overtime on property you invest into. Dependent on economy, interest rates, location, type of property etc
Speculative investments
a high-risk investment made in the hope of earning a relatively large profit in a short time such as antiques, gems etc.
short-term capital gain
a gain on assets that were held less than 12 months taxed higher than long term capital gains
Stock is a form of ____
equity
Dividends
Earnings distributed to stockholders. Not mandatory
Appreciation of a stock
increase in value of stock
When can you receive dividends for a stock you sell
As long as you're the owner on day that distributor established you'll receive dividend
Stock split
the division of a single share of stock into more than one share
preferred stock
A special type of stock whose owners, though not generally having a say in running the company, have a claim to profits before other stockholders do. Safer than common stock.
Blue chip
A nationally known company that has a consistent pattern of profit growth and dividend payments over the last several years. i.e. Johnson and Johnson
cyclical stock
has a market value that tends to reflect the state of the economy i.e. Harley Davidson
defensive stock
a stock that remains stable during declines in the economy and has consistent dividends i.e. Utilities, grocery stores
growth stock
A stock from a company which has a consistent record of relatively rapid growth and earnings in all economic conditions. i.e. Amazon
income stock
pays higher-than-average dividends compared to other stock issues i.e. exon-mobile
large-cap stock
stock from a corporation that has issued a large number of shares of stock and has a large amount of capitalization
i.e. google and microsoft and apple
mid cap stocks
firms that issue more than $2 billion to $10 billion of stocks
i.e. american eagle
small-cap stock
a stock issued by a company with a capitalization of $500 million or less
i.e. Big lots
Micro Cap Stock
a stock issued by a company that has a market capitalization of $300 million or less
i.e. Dobre motors
penny stock
typically sells for less than $1 a share, although it can sell for as much as $10 a share avg of $5 a share
stock market bubble
a situation in which stocks are trading at prices above their actual worth
Price Earnings Ratio
market price per share/earnings per share. Higher the PE ratio the more the owner of the share is paying. Well established companies have lower PE ratio.
projected earnings
EPS and PE based on historical data
Future expectations more relevant
Dividend payout ratio
Common dividends / net income
Dividend Yield Ratio
dividends per share/market price per share
beta value (beta coefficient)
a measure of stock volatility; that is, how much the stock price varies relative to the rest of the market. A beta of 1 is perfect with market. Below 1 is stock to increase and decrease less than market. Above 1 is more volatile and more extreme changes w
PEG ratio (price-earnings growth)
a way to rationalize buying a stock that has high growth is to calculate by dividing the P/E ratio by the company's projected growth rate
Total Return for a Stock
Annual dividends as well as any change in original price of stocks
Fundamental Analysis
the study of a company's accounting statements and future prospects to determine its value
Technical Analysis
research on recurrent and predictable stock price patterns and on proxies for buy or sell pressure in the market. Focuses on supply and demand.
Efficient market theory
A theory based on the premise that the stock market processes information efficiently. The theory postulates that, as new information becomes known, it is reflected immediately in the price of stock and, therefore, stock prices represent fair prices. It i
primary market
market for selling financial assets that can only be redeemed by the original holder
investment bank
trades in financial assets and is not covered by deposit insurance
initial public offerings
the first public issue of financial instruments by a firm
secondary market
the market in which previously issued securities are traded among investors
Security exchanges
A marketplace where members (brokers) representing investors meet to buy and sell securities.
over the counter market
a network of dealers who buy and sell the stocks of corporations that are not listed on a securities exchange
stock broker
a person who links buyers and sellers of stock
full service firm
company that handles all of a clients needs
discount firm
Good for people who are familiar with stock but not 100% comfortable doing online trading themselves
Online Brokerage Firms
An online company that will buy or sell your securities for you for a fee. Best for people fully comfortable with stocks and selling them online.
Commission charges
Price for selling and handling your stocks
market order
a request to buy or sell a stock at the current market value. Market price is not guaranteed.
Limit order
A request to buy or sell a stock at a specified price. i.e. you want to sell several stocks at a price of $1500 when it hits that
stop loss order
an order to sell a particular stock at the next available opportunity after its market price reaches a specified amount (a low point)
Long-term investments
Generally, (1) investments in stocks and bonds of other companies that companies normally hold for many years, and (2) long-term assets, such as land and buildings, not currently being used in operations.
Buy and hold
an investment strategy that involves simply buying stock and holding it for a period of years
dollar cost averaging
investing roughly equal amounts of money at regular intervals. Helps investor to avoid buying high and selling low.
direct investment
Purchase stock directly from company without going through middle man and avoid fees
Short-term investing
The continual buying and selling of stock in an effort to have one's money grow faster than the general level of stock prices
Day Trading
Buying and selling securities directly over the Internet
Margin Buying
paying part of the cost and borrowing the rest from brokers
selling short
selling stock that has been borrowed from a brokerage firm and must be replaced at a later date. Investor believes stock will decrease and then you can rebuy and make profit.
Call option
the option to buy shares of stock at a specified time in the future
Equipped option
Right to sell stock at a specified price
hedge against inflation
Real property appreciation keeps pace or exceeds inflation rates.
Bond
A loan in the form of an IOU that pays interest and at the end payed the value in full
face value of a bond
The amount the issuer of a bond will have to pay on the maturity date.
maturity date of a bond
the date on which the loan repayment is due
interest rate of bond
the difference between the face value and the bond price, expressed as a percentage of the bond price.
Coupon date of a bond
Dates at which bond holder will be paid interest. Usually Bi annually
trustee of bonds
The agent who coordinates activities between the bond issuer and the investors in bonds. Makes sure company is in good standing to pay off bond
Is the interest paid to bond holders tax deductible?
Yes
debenture bonds
Bonds that are unsecured (i.e., not backed by any collateral such as equipment).
mortage bond
Sometimes refferred to a secured bond, is a bond that is backed by assets of the corporation.
Subordinated debenture bond
A type of bond. It is unsecured, and gives bondholders a secondary claim to that of mortgage of debenture bondholders with respect to interest payments and a claim on assets. This term is one of the reasons why corporations issue bonds (Objective 2).
convertible bonds
Bonds that can be converted into common stock at the bondholder's option
high-yield bonds
corporate bonds that pay higher interest, but also have a higher risk of default
call feature
a feature that allows the corporation to call in, or buy, outstanding bonds from current bondholders before the maturity date
sinking fund
an account managed by the bond trustee for early bond redemption
Serial Redemption
bonds of a single issue that mature on different dates
Where are most bonds sold
brokerage outlets
current yield
Annual Income / Market Price of a bond
Market Value of Bonds
Annual income/CY
bid-ask spread
the difference between the bid price and the asked price
Treasury Bills
short-term government securities issued at a discount from face value and returning the face amount at maturity at 1 year
Treasury Notes
United States government obligation with a maturity of 2 to 10 years. Higher interest and every 6 months.
Treasury Bonds
Bonds issued by the federal government, sometimes referred to as government bonds. Up to 30 years with higher interest rates.
Treasury Inflation-Protected Securities (TIPS)
Treasury issues in which the principal amount is tied to the Consumer Price Index to protect the buyer against the effects of inflation
Federal agency issues
Fannie Mae, Ginnie Mae and Freddie Mac
Municipal bonds
Bonds issued by state and local governments
General Obligation Bonds
a municipal bond that is backed by the issuer's full faith and credit or full taxing authority
Revenue Bonds
investments secured by the revenue generated by a state or municipal project
Tax Advantages of Municipal Bonds
-Interest income is normally exempt from federal taxes.
-Interest income within a particular state is normally exempt from the income taxes (if any) of that state.
Bond Ratings
A rating assigned to a firm to measure the probability of default by a company like S&P or Moody's.:
Aaa. AAA etc
mutal fund
fund that pools the savings of many individuals and invests this money in a variety of stocks, bonds, and other financial assets
About how many people own mutual funds?
Almost half of U.S. households
Closed-end funds
About 2% of all funds are set up this way. Shares are traded and limited and must purchase from another investor.
Exchange traded funds
About 8% of funds are set up this way. Tied to index of market in which it is traded, lower fees bc it is passively managed
Open-ended funds
About 90% of mutual funds. that does not restrict how many shares will be bought. Shares issued and redeemed by company that sets NAV.
Net Asset Value
Amount that one share of a mutual fund is worth
front-end load
Fees paid to the mutual fund company as an entry requirement into certain mutual funds.
contingent deferred sales load
A 1 to 5 percent charge that shareholders pay when they withdraw their investment from a mutual fund.
no load/C shares
funds that do not require you to pay to invest
12b-1 fees
annual fees charged by a mutual fund to pay for marketing and distribution costs
Expense ratio of a bond
You want a low expense ratio on funds you purchase
Aggresive Growth Funds
Rapid growth with higher turn over
Growth stock fund
buy stock in companies with higher-than-average revenue and earnings growth
equity income funds
mutual funds that focus on firms that pay a high level of dividends
Index funds
mutual funds that mirror the composition of a particular market or index. Lower management fees and expense ratios.
Global Stock Funds
buy stock in companies in the US and other countries
International funds
invest strictly in foreign securities
Large cap funds
invest in companies with capitalization of $10 billion or more
Mid-cap funds unit 2
Have between $2 billion and $10 billion capitalization.
The lower the market cap, the greater the volatility.
Small-cap funds unit 2
Have less than $2 billion capitalization
regional funds
buy stock in companies in a specific region of the world
Sector Funds
mutual funds that focus on a specific industry or sector, such as technology stocks
Socially responsible funds
avoid investing in companies that produce harmful products i.e. tobacco, nuclear energy, weapons
junk bonds
a special type of high interest-rate bond that carries higher inherent risks
long term corporate bonds
based on high quality bonds with 10 or more years
Long-term U.S. bond funds
US Treasury and US zero-coupon bonds with maturities more than 10 years
Intermediate corporate funds
3-10 years
Intermediate U.S. Bond Funds
buy treasury securities with maturities of 3-10 years
Short-term corporate bond funds
investment grade bonds with maturities less than 3 years
short term U.S. bond funds
invest in US Treasury issues of less than 3 years
Asset Allocation Funds
invest in various asset classes, such as stocks, and bonds, with precise amounts within each type
Balanced funds
invest in a combination of stocks and bonds
value funds
invest in stocks considered to be selling below their true value
funds of funds
mutual funds that primarily invest in shares of other mutual funds
Lifecycle Funds
initially invest in more risk-oriented securities and become increasingly conservative and income-oriented as a specified retirement date approaches
Money Market Funds (MMFs)
accounts that pool money from individuals and invest in securities that have a short-term maturity, such as one year or less
mutual fund family
investment management company that offers a number of different funds to the investing public, each with its own investment objectives or philosophies of investing
A good fund manager can
Raise your funds when economy is good and maintain them when economy is down bad
prospectus
an investment report to potential investors
income dividends
the earnings a fund pays to shareholders
capital gains distributions
Proceeds received from the sale of securities are distributed to shareholders
automatic investment plan
an automatic savings program that enables an investor to channel a set amount of money systematically into a given mutual fund
reinvestment plan
a service provided by an investment company in which shareholder income dividends and capital gain distributions are automatically reinvested to purchase additional shares of the fund
Primary Residence
A person's home or where they live the majority of the time, which is considered more than six months of a year.
Secondary Residence
Property that investor does not live in full time
commercial property
land and buildings that produce rental income
undeveloped land
Vacant land or plot that could eventually be developed bc it will be worth more when developers want it
Foreclosure investment
Opportunity to buy property for a low cost and sell it for profit
Limited Partnership (LP)
A partnership consisting of one or more general partners and sells to one or more limited partners.
Real Estate Syndicate
An organization of investors usually in the form of a limited partnership who have joined together for the purpose of pooling capital for the acquisition of real property interests.
Equity REITs
Real estate investment trusts that invest in and operate income-producing properties
Mortgage REITs
Real estate investment trusts that purchase mortgage obligations and effectively become mortgage lenders.
Hybrid REITs
Real estate investment trusts that invest in both properties and mortgages.
Mortgage
a specific type of loan that is used to buy real estate
Federal regulation of REITS
-Must give 90% of income to shareholders
-Must have at least 100 shareholders with equal distribution
-Cannot engage in speculative short term gains
-Must hire 3rd party supervisors
-Must invest at least 75% of total assets into real estate
Pooled Mortgages
Equity investment of a pool of mortgages purchased by government agency to sell
Advantages of primary home investment
-you hold title
-live here
-mortgage interest is tax deductable
-inflation hedge
-Beware of housing bubble
Advantages of secondary vacation home
Possible tax advantages if it is not rented out for income
Indirect financial investment of real estate
Your only liability is your investment. No administrative responsibilities.
financial leverage
the use of borrowed funds to increase the return on owners' equity
i.e. you purchas a home at 3.5 % interest rate and value of home increases 6% per year. The value of home beats out interest rate and thats leverage.
Positive Cash Flow
bringing in more cash than you are spending on a property
Illiquidity
an inability to convert assets into cash quickly i.e. real estate takes a while to sell
Advantages/Disadvantages in investing in precious metals and collectibles
-Hedge against inflation
-safe haven during political turmoil
-Need storage space
-Can be risky
Misconceptions about retirement planning
-Expenses will decrease
-My retirement will last 15 years
-My social security and pension are enough
-I will have adequate health care
-Too late to save.
The three legs of retirement income
Social security, employer sponsored plans, self investments
How many credits do you need for social security?
40 points
Spouse benefit of social security
Eligeable up to 50% of workers benefit amount
Percentage increase of social security from ages 62-70
8% each year
Individual Retirement Account (IRA)
A qualified retirement plan that provides most individuals with a deferred federal income tax benefit.
Traditional IRA
Individual Retirement Account - A personal qualified retirement account through which eligible individuals accumulate tax-deferred income up to a certain amount each year, depending on the person's tax bracket.
Roth IRA
A personal savings plan; contributions are not tax-deductible; earnings are tax-free
Spousal IRA
allows a spouse who is not in the paid labor force, or a low-earning spouse to make a fully deductible contribution to a traditional IRA
Rollover IRA
an individual retirement account into which you can transfer your assets from your company retirement plan tax-free while avoiding penalties
Education IRA
- method to provide funding up to $2,000 per year not taxable
SEP IRA
Of the tax-favored retirement plans for the self-employed and small business employee. Limit is 25% of salary
Keough Plan
Retirement plan for the self employed
Annuities
a fixed sum of money paid to someone each year, typically for the rest of their life from the government
In your 20s how much of your income should you save?
12-15%
If older than 20s how much of your income should you save?
20-25%
Biggest mistakes in retirement
-Underestimating you savings goal
-Starting too late
-Not contributing enough to yourself
-Taking money out before retirement
-Underestimating life span
-Overestimating how much you can withdraw at retirement
Estate
Wealth accumulated over a lifetime
Estate planning
Defining a plan for administration and disposition of property during lifetime or at death
Reasons people don't estate plan
Unwilling to face mortality
Procrastinators
Current health is good
Costs
Lack of knowledge and understanding
Unaware of asset values
3 ways to transfer estate
Will- legal declaration for disposition of assets, kids could become wards of state if you have no will
Contract - Beneficiary designations, property ownership designations and debt assignments
Law- State's laws for passing on property via heirs
Dying intestate
Dying without a will
Probate
The judicial process to prove or confirm a will or settle an estate
simple will
A will that leaves everything to the spouse; also called an I love you will
Marital Share Will
Leaves half of estate to spouse and other half to heirs/family
exemption trust will
A will where everything goes to spouse except the estate tax exemption amount
stated dollar amount will
a will that allows you to pass on to your spouse any amount that satisfies your family objectives
Formal Will
A will that is usually prepared with an attorney's assistance. Type written and signed with witnesses.
self-proving will
Notarized will that witnesses were there, does not have to be proven in court.
Holographic will
Self written will, must be written and dated in handwriting without discrepancies. Some states do not recognize these
executor
person designated to execute the terms of a will
Guardian of a will
Guardian assigned for any minors in your will
What happens if you die without a will?
The courts will determine how your assets will be distributed based on state law
Revocable Trust
a trust whose terms the trustor retains the rights to change
Irrevocable Trust
a trust that cannot be altered or ended by its creator
Advantages of using a trust
Reduce or provide payment of estate taxes
Avoid probate and transfer assets
Provide income for surviving spouse
Others handle management
Misc administrative tasks
Power of Attorney (POA)
a legal instrument used by a principal (person) to grant legal authority to one or more agents to make certain legal and financial decisions on behalf of the principal
General POAppointment Trust ("A" Trust)
Irrevocable Trust created during an individual's lifetime or at death giving an agent the right to appoint assets after that individual's death
Durable Power of Attorney (POA)
a document that permits an individual to appoint another person to make any decisions regarding health care if the principal should become unable to make decisions
Springing Power of Attorney
an instrument in writing authorizing one person to act as an agent for another affective only upon a certain event occurring.
health care power of attorney
a document in which an individual appoints someone to act as his or her agent for health care decisions
living will
A document that indicates what medical intervention an individual wants if he or she becomes incapable of expressing those wishes.